THE NEW YORKER, MAY 4, 2015
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symptomatic of what was happening across corporate America:
as Mark Muro, a fellow at the Brookings Institution, put it to me,
"The distended shape of G.E. really reflected twenty-five years
of financialization and a corporate model that hobbled compa-
nies' ability to make investments in capital equipment and R. & D. "
Finance is also inherently risky. Admirers claimed that cun-
ning risk management enabled G.E. Capital to "eliminate---
or at least reduce---all risks that do not carry a big potential
payo ."As if. When the financial crisis hit, G.E. Capital's earn-
ings plummeted, and the division's dependence on borrowed
money jeopardized the company as a whole. Keeping it afloat
required the support of the Federal Reserve and an F.D.I.C.
guarantee of more than fifty billion dollars in unsecured debt.
Govindarajan told me that Immelt had wanted to move
G.E. back to its industrial roots even before the crash, and, in-
deed, since 2001 G.E. has more than doubled its R. & D. spend-
ing. But dependence on finance was a hard habit to break in
the bubble years, with G.E. Capital rolling in cash. The crisis
made the decision easier. Shareholders are
now wary of finance---G.E.'s stock rose
more than ten per cent after Immelt's an-
nouncement---and post-crisis legislation
reined in G.E. Capital's freewheeling
ways. The business, which had lost its
triple-A rating, was designated a "system-
ically important financial institution," and
that limits the amount of leverage it can
use and subjects it to tougher regulations.
Meanwhile, the outlook for industry is
better than it's been in a long time. Amer-
ican manufacturing was decimated during
the first decade of this century, with six
million jobs gone, and it was easy to be-
lieve that manufacturing was a lost cause.
Yet it still accounts for more than two tril-
lion dollars in output, and American fac-
tories are still among the most productive
in the world. What's more, energy costs here are falling, and
labor costs abroad are rising. Suddenly, the U.S. seems like a rea-
sonably a ordable place to make high-end products, like G.E.'s
jet engines and gas and wind turbines. There's a growing mar-
ket for such products, too. As developing countries get richer,
they're spending more on power, transportation infrastructure,
and health care. The energy sector, even with the recent drop
in oil prices, has a voracious appetite for exploration and drill-
ing. These are all industries that G.E. specializes in.
This kind of manufacturing, with its automated, high-tech
factories, doesn't create as many jobs as old-fashioned heavy in-
dustry, but the gains are still significant. In the past six years, G.E.
has opened more than twenty new plants and added more than
sixteen thousand new workers in the U.S. "We're not talking about
some nostalgic, morally attractive American folkway," Muro said.
"Advanced manufacturing is a major driver of innovative activ-
ity, exports, and economic growth. So it's good to see a hallmark
company refocussing on it."After twenty-five years of the finan-
cial tail wagging the industrial dog, it's time to try something new.
---James Surowiecki
Few phrases are duller than "corporate restructuring." So
you can be forgiven if your eyes glazed over when, two
weeks ago, Je Immelt, G.E.'s C.E.O., announced that the
company was going to sell o most of G.E. Capital, its financial-
services arm, and concentrate on the company's industrial
businesses (which range from aircraft engines and locomo-
tives to medical devices and power generation). But this is a
genuinely momentous move. Not only is G.E. reinventing it-
self; the move from financial services back to industry could
herald the close of an entire chapter of American capitalism.
In the public imagination, G.E. never stopped being an in-
dustrial company, but for the past three decades it's also been,
essentially, a huge bank. Its finance division got started during
the Great Depression, as a way of help-
ing consumers pay for washing machines
and refrigerators. But Jack Welch, who took
over in 1981, was obsessed with "growing
fast in a slow-growth economy." G.E.'s
traditional businesses, like appliances and
lighting, were no longer growing quickly,
so Welch needed a new profit engine. Enter
G.E. Capital. It became a key source of
profits, growing almost twice as fast as
the company as a whole and expanding
into every conceivable market: consumer
lending, credit cards, equipment leasing,
commercial real estate, auto loans, lever-
aged buyouts, even subprime mortgages.
G.E. Capital had a couple of advan-
tages. Because it was not o cially a bank,
it faced less regulatory supervision. And,
because G.E.'s industrial businesses still
generated steady profits, the financial arm operated with a pris-
tine triple-A credit rating. (Most big banks are a notch or two
lower.) That meant that it could borrow money more cheaply
than its competitors, which made its lending highly profitable.
Indeed, the sharp ascent of G.E.'s share price during Welch's
tenure arguably owed as much to G.E. Capital as to Welch's fa-
mous management style (Fortune called him "the most widely
admired, studied, and imitated CEO of his time" ). By 2000,
financial services accounted for more than half of G.E.'s reve-
nue. Even after Welch retired, in 2001, finance remained cru-
cial. By the middle of the decade, it was responsible for about
half of G.E.'s profits.
But finance entailed problems that weren't apparent until
after Welch left. G.E. Capital sucked up more and more of the
company's resources. In the course of Welch's tenure, G.E.'s in-
house R. & D. spending fell as a percentage of sales by nearly
half. Vijay Govindarajan, a management professor at Dartmouth
who worked as chief innovation consultant to Immelt from 2008
to 2009, told me that "financial engineering became the big
thing, and industrial engineering became secondary." This was
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CHRISTOPH NIEMANN